(Reuters) - A U.S. appeals court on Tuesday backed Iran in a dispute with Americans who demand that Persian antiquities in two Chicago museums be used to pay damages for victims of a 1997 suicide bombing in Israel.

The decision by the 7th Circuit Court of Appeals overturns a lower court ruling allowing the U.S. plaintiffs to search for any and all Iranian assets in the United States to pay a $71.5 million judgment against Iran.

The case grew out of a September 1997 triple suicide bombing at a Jerusalem pedestrian mall that killed five people and injured 200. Two members of the Islamist group Hamas were convicted.The lawsuit filed by five groups of Americans who were either seriously wounded or relatives of the injured argued Iran bore responsibility because it provided training and support to Hamas for attacks.Having won their case, the plaintiffs embarked on a search for Iranian assets to pay the judgment. They found three collections of ancient Persian artifacts -- prehistoric pottery, ornaments, and precious tablets with Elamite writing -- owned by or on loan to Chicago's Field Museum of Natural History and the University of Chicago's Oriental Institute.

The museums argued the artifacts qualified for immunity under U.S. law and could not be used to pay the judgment. They said seizing the artifacts would set a dangerous precedent for institutions who rely on scholarly interest to trump political and legal disputes.

But the plaintiffs insisted the artifacts were fair game, arguing U.S. legal protections afforded to foreign-owned property do not apply when the property is used for commercial purposes, or when it belongs to an agent linked to a terrorist group.

Iran initially ignored demands that it appear in U.S. courts to assert its sovereign rights. It later hired an American lawyer to represent its interests.

The appeals court did not rule on the fate of the antiquities but it said the lower court wrongly denied Iran its sovereign immunity, which it says is presumed and did not need to be asserted in court by Iran.

The ruling also voided the lower court's order that all Iranian assets in the United States be disclosed, and sent the case back to the lower court for further proceedings "consistent with this opinion."

Chicago's Field Museum of Natural History and the University of Chicago's Oriental Institute won a victory on Tuesday in their efforts to maintain possession of thousands of ancient Iranian artifacts. In a ruling, the U.S. Court of Appeals for the Seventh Circuit reversed a lower court's order that might have handed the artifacts over to several American victims of a 1997 terrorist bombing in Jerusalem.Those victims won a $90-million judgment in 2003 against the government of Iran, which is believed to have financed and trained the terrorists who carried out the Jerusalem bombing. But the victims and their families have struggled to collect any of that judgment from Iran, and their lawyers have sought instead to seize purported Iranian assets in the United States, including antiquities held in American museums. Those legal efforts have been condemned by some scholars as a dangerous politicization of the world's archaeological heritage.

In Tuesday's ruling, a three-judge panel of the Seventh Circuit ruled that the lower court had misinterpreted the Foreign Sovereign Immunities Act of 1976, which generally protects the property of foreign governments in the United States. The plaintiffs have asserted that the antiquities in Chicago are exempt from that immunity because of a provision in the 1976 law that excludes property "used for a commercial activity."

The lower court had ruled that the plaintiff's argument on that point must win by default because Iran had not come forward to assert its immunity under the 1976 law. But the Seventh Circuit, like other appellate courts in similar recent cases, ruled that the 1976 law requires courts to decide for themselves which foreign immunities apply to each case, whether or not a foreign government has explicitly demanded those immunities. (Complicating the case, Iran did eventually come forward to assert its immunity.) ...